Last week, our analysis of the financial statements of 15 cement companies showed that the first half of the fiscal year went impressively well for the industry as a whole, considering how badly the economy has been faring. In 1HFY24, cement companies saw combined revenues increase by 20 percent, eventually leading to a 24 percent uptick in post-tax earnings (with a tax incidence of 35% on average), and a small increase in margins compared to 1HFY23. This came on the back of dispatches going up by 10 percent, bolstered predominantly by exports that more than doubled (2.1x). Local dispatches though remained weak, up on 1 percent in 1HFY24.

What has happened since December though is domestic demand becoming even weaker than in the first half and exports growing by less than former months. In 8MFY24 for instance, total dispatches are up 2.5 percent cumulatively, of which exports grew 73 percent and domestic sales actually declining by 3 percent. At the same time, in the past four consecutive weeks, cement prices have been slowly tracing their steps back. Even more concerning is that there is a distinct volatility in prices since July.

On the one hand, the industry has on its hand a domestic demand that is not ready to bounce back, and on the other is the jerkiness in domestic prices. For context, let’s compare the monthly average sales in the domestic market for the industry between Fy17 and Fy24 for the period 8M. Data suggests, Fy24’s monthly average thus far is lower than every year except Fy17 and Fy19, which would be even more unsettling if we consider the capacity growths that have happened over the past five years. Despite impressive growth in exports, total capacity utilization for the industry is trailing lower than 60 percent. At this rate, even if exports maintain 15 percent of the total sales mix—which they are at the moment—the industry will be set back at least six years in terms of total offtake. Prices are up by a multiple of 2-2.5x since that time, which means the industry may still keep making money, but by no means, is this positive news.

Specially, if prices slowly keep coming down and/or there is no reprieve in energy and transport costs. Though the industry has spent hefty sums on energy efficiency projects and tooled their plants to use a mix of coals from multiple sources, rising costs remain a concern, specially if there is a price competition among cement players. Having said that, if the past year has been any guide, predicting price wars may seem like fear mongering at this point as companies continued to maintain a tacit understanding on prices in various markets such that despite reduction in dispatches and decline in capacity utilization, prices never came down a certain level. It seemed more beneficial to keep prices looking forward and up. What remains to be seen is the inflection point where companies begin to retract from the group and think about fending for themselves. Thus far, that point was never reached, but it may soon if individual capacity utilization drops below 50 percent despite companies making efforts to sell their product overseas.